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New Service Offers Music in Quantity, Not by Song

Daniel Ek, the 28-year-old co-founder and public face of Spotify, the European digital music service, paced around the company’s loftlike Manhattan office on Tuesday afternoon, clutching two mobile phones that buzzed constantly.

After nearly two years of stop-start negotiations with record labels, Spotify was preparing to finally open in the United States. With less than 48 hours before its planned start, however, the company still had not completed its final major label deal, with the Warner Music Group.

Yet Mr. Ek said he was confident that there would be no delay, and that Americans would soon be able to experience what has made Spotify the world’s most celebrated new digital music service. He was right. By Wednesday afternoon, Spotify’s deal with Warner was signed, and on Thursday, as scheduled, it will become available in the United States.

“We’ve made it easier to listen, and we’ve made it easier for people to share,” Mr. Ek said. “Hence, people tend to get more into the experience, and they tend to find new music and build larger collections that they want to take with them. And therefore, they also pay more for music.”

If Apple’s iTunes ushered in digital music’s first phase as a large-scale business, then Spotify and other services like it could be its future. Rather than selling individual tracks to be downloaded, subscription services sell monthly access to vast catalogs of music, with whatever songs a listener wants to hear streamed directly to his computer or mobile phone.

Spotify will be offered in the same three-tier plan that it has in Europe: a free, ad-supported version; a basic ad-free version for $5 a month; and a premium service for $10 a month that adds access on a mobile phone, higher audio quality and other perks.

At first, Spotify’s free version will be available by invitation only, given out through current users or by the company to the thousands who have requested the service on Twitter and through its Web site. (Paid subscriptions will be available right away.)

With its lightning-fast interface, easy integration with Facebook and “freemium” business model, Spotify has quickly become the most popular such service in the world. Begun in Sweden in 2008 and until now available in only seven European countries, it has signed up 1.6 million paid subscribers and more than 10 million registered users in total. It also has been one of the fastest-growing investments in the new digital boom, having recently raised $100 million in a round of investment that valued the company at $1 billion.

But Spotify faces a number of challenges in the American market. While the company had relatively little competition in Europe as a subscription service, in the United States a number of similar companies have gotten a head start, including Rhapsody, Rdio and MOG. Like those services, Spotify allows its premium users to save a certain number of tracks to their phones for offline use, in the subway or on the plane. And new cloud services from Apple, Google and Amazon promise to make people’s music collections available anywhere they go.

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Daniel Ek, chief and co-founder of Spotify, in its new offices in Manhattan. The service, which began in Sweden in 2008, offers subscriptions to vast catalogs of music, but it faces competition from similar services in the United States.Credit
Chester Higgins Jr./The New York Times

Whether the company makes a profit is another question. It lost $26.5 million in 2009, but it has not reported on its financial performance for last year.

Spotify’s speed offers the company one significant advantage over its American competitors. (It achieves that speed partly through using a peer-to-peer network, which lets a song play almost instantaneously.) But its crucial selling point has been its free access, which the company believes can lure in new users, who then get attached to its playlisting and social networking features and will be enticed to join.

That reliance on free access, however, has also worried American record labels and some analysts, who fear that it could cannibalize sales from other sources, like iTunes.

“What Spotify seems to be doing is solidifying a perception that music should be free,” said Mark Mulligan, an independent media analyst in Britain. “It’s one thing to download from BitTorrent and keep looking over your virtual shoulder to make sure no one sends you a cease-and-desist letter. It’s another to be streaming music freely from a service that you know even the labels are advocating.”

Those concerns held up Spotify’s negotiations with the labels, and in April the company made concessions to the labels’ concerns by placing restrictions on the amount of time its free European users could spend on the service. For the first six months, a free user is now limited to 20 hours of listening a month; after six months, the limit becomes 10 hours, and no song can be listened to more than five times in a month. American users will be subject to the same limitations.

European users complained loudly when those restrictions were introduced, but Kenneth Parks, Spotify’s managing director for North America, who led most of the label negotiations, defended the changes.

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“It’s still an amazing experience that’s free for the rest of your life,” Mr. Parks said. “It has not diminished the magic of what Spotify is about, and millions and millions across Europe, and soon the U.S., will validate that.”

Spotify argues that by offering virtually all available music free, and sharing advertising revenue with record companies (the major labels own about 18 percent of the company), it removes the appeal of piracy, and consumers who had been lost to the industry can be lured back.

For Mr. Ek, Spotify’s success is directly attributable to its ease of use as an alternative to illegal downloading, which in his native Sweden had almost completely overtaken the market when he and a partner, Martin Lorentzon, founded the company.

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A page of new releases on Spotify.

“At the time you could only buy DRM music tracks for 99 cents,” he said in his slight Swedish accent, referring to digital rights management, the system of restrictions used by iTunes and other digital retailers.

“At the same time, I could steal a file which cost zero, had no restrictions whatsoever and had better sound quality,” he said. “The illegal, pirated product was actually better than the one you purchased. So our view is, ‘How do we create a better product than piracy?’ ”

Another concern for labels has been the size of Spotify’s royalty payments, which are computed in fractions of a cent per stream, an order of magnitude less than the royalties associated with downloads and CD sales. (Download royalties vary, but in general record labels and artists collect about 70 percent of the retail cost of a download, which is typically $1.)

That means that song has to be streamed many times for it to make as much money as a download, but labels say that as Spotify has grown, those streams have started to add up.

Last year, Spotify paid about $60 million in royalties; that made it the second-largest source of digital revenue for European record labels, after iTunes, according to the International Federation of the Phonographic Industry.

“Spotify are currently one of our top digital partners globally by revenue, and that is with them only being open in seven European territories,” said Simon Wheeler, the director of digital for the Beggars Group, an independent label group whose artists include Adele and Vampire Weekend. “I expect them to be second or third place this year for us.”

Many analysts and music executives say they believe that Spotify’s greatest advantage in the United States is Facebook. The service is already closely integrated with Facebook, so that users can easily share songs with friends and play with features like drag-and-drop playlists.

Spotify is also one of several digital music services that has been in talks with Facebook to help it develop an extensive media platform that could instantly raise its profile here.

Spotify declined to comment on those talks. But Mr. Ek said he was not concerned about the company’s ability to build up to a large scale in the United States.

“We want to make it simple for people,” he said. “If you want to take your music with you, you shouldn’t have to worry about 15 different sync programs or anything else. It ought to be as simple as pressing play and it works. And ultimately when you get to that point, that’s when people are prepared to pay. People are prepared to pay for convenience.”

A version of this article appears in print on July 14, 2011, on Page B1 of the New York edition with the headline: New Service Offers Music In Quantity, Not by Song. Order Reprints|Today's Paper|Subscribe